Oil producers struggle to keep prices at $100

Producers believe this price is fair despite Western claims it hurts growth

By

Staff

PublishedSunday, June 24, 2012

Oil prices have plunged by nearly $28 over the past few weeks to nearly $100 because of rising inventories and receding fears about Iranian supply shortages and this poses a challenge to major producers to curb further falls.

According to a prominent Arab energy analyst, Saudi Arabia and other major producers contributed to depressing prices by raising output to offset the decline in Iran’s oil exports following US-le sanctions over its nuclear programme.

“The biggest challenge facing major oil-producing countries is maintaining oil prices at $100 a barrel regardless of any changes the markets may face in times ahead,” said Walid Khadduri, former information director at the 10-nation Organisation of Arab Petroleum Exporting Countries (Oapec).

"The pressing question now is the following: how do major oil producing countries deal with the decline in oil prices? Before answering this question, we must first note that the earlier rise in prices to the level of $128 did not realistically reflect market fundamentals of supply and demand,” he said in an article published by the Abu Dhabi-based Emirates Centre for Strategic Studies and Research.

He said the main reason behind such high price levels was the fear of supply shortages caused by Western sanctions on Iran’s crude exports, the state of political instability in some other oil producing countries and rising demand for crude oil in emerging markets.

As is usually the case in times of crises, such concerns were accentuated by speculation and rumors that major oil producers in the Gulf would not be able to meet shortfall in supplies, said Khadduri, an Iraqi.

“However, when major oil producers – particularly Saudi Arabia – began to tap into their spare capacities to allay fears of the market, supplies increased above the actual need of these markets, leading to a strange paradox,” he said.

“At a time when prices were going up, stockpiles of oil were also rising, as indicated in the reports of several US oil companies….in addition, differences between Brent and US crude prices have also widened.”

Khadduri noted that high prices help in meeting financial needs and obligations of producers related to the completion of major projects (particularly those related to oil exploration and production) and provide welfare subsidies to citizens (such as electricity, water and fuel at lower prices than the cost of production).

On the other hand, major oil-producing countries face challenges in the event of significant price increases such as loss in crude oil’s competitiveness with other energy resources, he added.

He said this problem has increased in recent times with the rise of alternative and renewable sources of energy, such as increase in shale oil and tar sands oil production along with solar and wind energy.

“The question now is what policies are needed to deal with declining oil prices? Since prices are currently declining due to an increase in oil supplies and worsening financial crisis in Europe, major oil-producing countries – particularly in the GCC – could revert to quotas set by OPEC agreements to achieve the right balance between supply and demand,” he said.

“It is worth mentioning that a fair price at the current stage for both producers and consumers is about $100 a barrel. Thus, it is expected that oil-producing countries will target this price level and maintain it even though officials of the International Energy Agency believe that this price could hurt global economic recovery and seek a lower price range for oil.”

According to Khadduri, there are a number of other factors which will determine the future price of oil, some of which lie beyond the control of oil producing countries while others pertain to difficult experiences that OPEC member states have endured in the past.

“For example, there is a lot of uncertainty on how Iranian nuclear issue unfolds and whether it will be resolved diplomatically or through the military option? Recourse to any of these two options will have an effect on oil markets in the short to medium term,” Khadduri said.

“Opec is aware that in times of crises, as was evident during the Asian economic crisis in 1998 and during the global economic crisis of 2008 – it is very difficult to initially arrest falling oil prices because in such times oil-producing countries generally increase their production to compensate for revenue losses resulting from lower prices,” he added.

“He said this brings down prices further. For example, prices dropped from their record highs of above $140 a barrel to $35 per barrel within a few months of 2008….this underscores the need for greater cooperation among Opec members during times of crises to reduce the possibilities of a sharp fall in prices which could harm the interests of every side.”